管理層發言
Good day, and welcome to the Watsco Second Quarter of 2025 Earnings Conference Call. Please also note that this event is being recorded today. I would now like to turn the conference over to Albert Nahmad, CEO and Chairman. Please go ahead.
Good morning, everyone. Welcome to our second quarter earnings call. This is Al Nahmad, Chairman and CEO, and with me is A.J. Nahmad, President. Paul Johnston, Barry Logan, and Rick Gilman. Before we start, our normal cautionary statement, this conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of laws. Ultimate results may differ materially for the forward-looking statements. Watsco delivered healthy second quarter results in a soft market condition, I should say, under soft market conditions. 2025 marks a year of significant product transition to next-generation equipment containing A2L refrigerants. This transition affects roughly 55% of our historical product sales and impacts our inventories, our supply chain, staffing levels in our branches, and other aspects of our business. Regulatory changes have historically been good for our business and our customers; we expect that this transition will be no different than has happened in the past.
The changes are substantial and complete, and we look forward to simpler operations in 2026. Let me turn to second quarter highlights. Sales declined 4%, reflecting double-digit pricing gains for new equipment, offset by lower volumes. We had a late start to the summer season. Sales for residential new construction and international markets remain subdued. On the plus side, Watsco achieved record gross profit margins. Our performance yielded an increase in EBIT and expanded EBIT margins despite lower sales. Our results benefited from OEM pricing actions, and our pricing technology platform, Pricefx, also contributed. Gross margins remain a focus, and there is much potential to improve over time. SG&A increased 6% as we incurred extra costs during the transition. We also added 10 new locations from recent acquisitions. Our balance sheet remains solid. We have a strong cash position and no debt.
We continue to invest in innovation and technology to separate us from our competitors. Watsco's technology journey began 15 years ago, and we have made terrific progress. For example, e-commerce continues to grow and is now a $2.5 billion business or 34% of our sales. Mobile apps now have 70,000 users and grew 17% versus last year. The annual volume of products sold through OnCall Air, which is our digital selling platform for customer contractors, increased 19% to $1.6 billion. This is a great assist to our customers. But we are not standing still; we are making further investments. We are building on or adding new initiatives to drive growth and delight our customers. Examples include a technology-driven sales platform being developed to capture larger national customers. This would be incremental to Watsco's core replacement business and is expected to be launched in 2026. We have accelerated the adoption of our pricing platform, Pricefx.
Our goal is to reach a 30% gross profit margin. We have launched initiatives to grow the parts of the supply segment of our business, which today is roughly 30% of sales and can be much larger over time. We launched two AI platforms, one internal and one external, to harness our data. Artificial intelligence offers the potential to further transform our customer experience, improve operating efficiency, and create new data-driven growth strategies. This is an exciting time, and these are just a few of the many initiatives underway. Now we will expand on these themes at an investor event in Miami, which will occur after temperatures have dropped a bit. Stay tuned for additional details. Finally, we believe that our culture of innovation, along with our unique entrepreneurial culture and capacity to invest, are unmatched in our industry. With that, let's turn to Q&A.
分析師問答
And our first question here will come from Ryan Merkel with William Blair.
My first question is just on volumes in the quarter which were a little bit worse than I was expecting. I know you mentioned weather, A2L, new construction. I would just love to hear from you what happened there? And then more importantly, are you seeing trends improve in July?
I'm going to ask both Paul and Barry to respond to that.
Yes. Revenues were not as strong as we anticipated going into Q2. What we saw was a kind of lumpy picture in the marketplace where April came in strong, May ended up being weak, mainly because of the weather patterns in the north. And then in June, it came back again. Residential New Construction is probably down 15% to 20%. Replacement is still holding fairly strong. We didn't really see a lot of repair in the beginning of the quarter, which we saw towards the end of the quarter and it continues into July but not enough to offset the unit sales that were certainly down.
I mean, on international sales.
Yes, I'll comment on that. Also on one of the exposures we talked about in the first quarter that repeated itself in the second quarter was our international, which is Mexico. Mexico is probably the most volatile market. It's a small part of our business, but a big contributor from a margin point of view. But Mexico was down - well, let's put it this way, it cost us about $0.10 a share in the quarter, $0.20 a share year-to-date. And June, it grew and July, it's grown since then. So I'll take kind of one market that's been irritating, which seems to be a lot better in the last couple of months. As far as July goes, Ryan, I would say it's better. August is bigger than July in our forward-looking commentary. So if I say that July is better than what we saw in June, that's okay, but it needs to extend itself and extrapolate itself as the year goes on. The good news is that, in general, what we can control is margin, pricing, and the wherewithal of our business to support all these new products in the market with our customers.
I'm glad we have our balance sheet to do that with because it's been a pretty extraordinary product change this year. You can see the building of inventories; that's a customer-focused effort to help our customers get going in this market. The margin speaks to capturing new pricing on, as we say, over half the products we sell, we had to capture price inflation since that price and get off on the right track in margins. And needless to say, that's been accomplished. So we like what we can control. We'll be patient about what we can't control. And I think also maybe this is more of a 2026 discussion. But the entire industry, every OEM we sell products for, have been through an extreme product cycle probably for the last 2 or 3 years. And at what point does that serenity play itself out in terms of growth and market share development and product expansion? The blocking and tackling that I think is particularly good for us and that we're good at. So maybe that's more of a next year event, but we're kind of looking forward to it, quite honestly.
Yes. That's fair. Okay. Since you mentioned gross margin, that was the other metric that was really strong this quarter; my sense is it's both price cost and initiatives. But my question is, I don't want us to extrapolate that 29% into the back half. So just how sustainable is that? Was 2Q kind of temporary due to price-cost timing?
Go ahead, Barry.
Yes. I think there is obviously an algebraic benefit to margin when OEMs raised prices in April and May. We talked last quarter that OEMs had faced some inflationary realities going on with tariffs and raw materials and so on, on top of the like-for-like price increase on the new product, they introduced inflationary pricing early in the quarter. That clearly helped build a bigger margin this quarter. And the benefit of that kind of slides off into the third quarter and fourth quarter. But I'm the one that probably, 3 years ago, talked about 27% as a floor, as a benchmark, and I stand by that obviously. And if I say now 27% plus, I would expect that for the last half of the year, but we won't have the benefit of those pricing actions that you see in the first half of this year. So somewhere in between would be my conjecture and the market will play out and determine what it is. But I think we have a chance to beat our benchmark but not have the benefit that we saw as extraordinarily this quarter in terms of pricing.
That's great. Better than I expected...
Just want to add. I mean, this is A.J. just real quickly. I mean, there is the benefit from the OEM price increases but also the efforts we're making, our price optimization and the leadership of those teams and the pricing teams, that's also working. So it's a combination of both, but we continue to put points on the board in terms of the pricing efforts that we're taking internally.
Let me add that as we move our product mix, which I mentioned in the opening statements, towards parts and supplies. And that's what we're focused on with our technology. That, by its nature, carries a higher margin than equipment sales. So our product mix, hopefully, sometime later this year or into next year will improve margins as parts and supplies carry higher margin.
And our next question will come from Brett Linzey with Mizuho.
Maybe just a follow-up on the last point there. So if you could maybe just unpack the year-over-year gross margin contribution. Is there any way to delineate that between the pricing optimization tools versus the parts mix versus some of that raw pricing just in the marketplace in the quarter?
That's an interesting question. Who wants to deal with that?
Yes, Brett, I'll respond to that. This is Rick. It's a bit of both art and science. Looking at the quarter and the year, we've seen a consistent gross margin enhancement of about 50 to 60 basis points due to raw selling margin, which reflects the daily operations of a distributor—what we purchase at and what we sell at. Without inflation, gross margins would have been in the high 27s, and while inflation assists, it’s not a sustainable factor. This has been consistent over the past 2 or 3 years. We estimate around 200 basis points of gross margin expansion is linked to pricing optimization and enhanced pricing technology. The complexity of pricing in our industry generally favors distributors since nearly every SKU has a unique price for each customer. It's important to note we're not fully optimized yet, and we see significant potential for improvement. Additionally, during this time, we've gained 200 to 250 basis points of market share over the last three years, primarily due to our technology advancements. All our technology efforts regarding margins haven’t compromised our customer acquisition and overall market growth.
That's very helpful. I appreciate that. And then just a follow-up on the cylinder shortage. It sounds like you guys think it abates by the second half. I know some of the peers think it does persist into the second half. So maybe what was the impact, do you think, in the quarter from the shortage situation? And then are you assuming that some of that does carry into H2?
Yes, we had an allocation issue where we were being provided with limited refrigerant. The OEMs addressed this by overcharging the units, which reduced the need for additional refrigerant during installation. As our allocations have improved over time, this concern has diminished. We expect to be off allocation by August. It was frustrating to deal with this situation, but I don't believe it was the primary reason for the slower market performance.
Yes. Just an editorial on that, the like-for-like SKUs that we're selling now, A2L versus the prior is the 10% difference in price and speed bump on the canisters or refrigerant is that a speed bump. And so the transition itself, as we look forward, again, to that word serenity I used earlier, we're looking forward to it.
And our next question will come from Tommy Moll with Stephens.
I wanted to start on inventory. Maybe you could characterize for us the investment there versus what you would have expected to need for the transition. Just in dollar terms, is it about what you would have soft circled or maybe a little elevated? Anything you can do to frame that for us? And then also how you think it might trend over the next couple of quarters?
The honest answer is that it's more than we had hoped for. Some of this is due to the unexpected lower industry demand. We peaked at about $2 billion, but we are now very focused on how to address this situation. So far in the third quarter, we have lost $200 million in inventory investment and are now down to $1.8 billion. Additionally, with the transition to new products, we need both the old and the new equipment, and we plan to phase out the old before the end of the year, which will help reduce our inventory investment. I am very committed to improving our inventory turnover, and while it has been a challenging time, I believe we can make progress.
Yes. On a raw number basis, we had double inventory. We had about 5% of the total inventory was 4.10%, and then we had the more expensive A2L product in there. So we probably had a 15% rise just between what we had in 4.10% left over and what we experienced when we have price increase. The balance of it is exactly what Al said; the demand just wasn't there to be able to take the inventory back down that you're going to see come down at the end of the third quarter.
As a follow-up, I wanted to ask about the M&A environment and pipeline, hasn't gotten a ton of their time lately, but how can you characterize that for us?
That's a very good question. We are eager to see what owners of the distribution businesses in HVAC are going to do with this existing very soft market. They may do nothing; they may continue or they may say, well, now it's time to do something in terms of an M&A. And of course, we have a great reputation with independent distributors because of the way we treat sellers; we're very careful about building relationships continuing post-acquisition with the existing leadership in the business acquired. So I can't say it's going to happen, but I'm sure hoping we have a very, very strong balance sheet. We could take advantage of opportunities as they come, though I cannot disclose much more than that. There is one that we think without disclosing much more than that, that is upside, and we'll see how that turns out. It's still under study.
Yes. I would say rest assured, we're having as many of those conversations as we can. We're super ambitious, and you have the balance sheet to support anything you want if we can manage to muster up. So hopefully, it can be an exciting period in M&A.
And our next question will come from David Manthey with Baird.
I was wondering if you have any insights on consumer preferences during this product transition, such as whether you are still seeing a premium on the R-410 systems. Additionally, as customers are purchasing the A2L, are they leaning towards one end or the other of the good, better, best SEER scale?
That's an interesting question. I wonder who in our team can respond to that. Paul? Are you the one, Paul? You always are.
Yes. The industry really hasn't popped as far as high-efficiency product. It's still at the entry level. I mean we're at basically using the old SEER rating, we're at above 15 SEER for minimum efficiency. So it's high-efficiency product. So we really haven't seen a change in the direction of the industry; it's still very much sliding along the idea that it's going to be whatever the minimum efficiency is. And that represents probably 85% of the market. That has not changed. And then when you get into the brands that we're selling, the brands have been consistent throughout the year, and they continue to hold steady. We're seeing the Carrier brand and the Rheem brand. And the Goodman brands all doing their jobs and holding up their share of the business. We're not seeing a migration to a lower branded product, no.
And David, just to add to that, for the front of it, if I look at brands, products, markets, customers, geographies, north and south, east and west, and we're selling close to 20 brands in the first half of the year is very consistent amongst that collection of datapoints. So nothing stands out, Dave. And I don't think this has been disruptive to what kind of the baseline products being sold is going on.
Yes. The exciting development is OnCall Air. When our customers utilize the tool we've designed for them, referred to as a sales engine, they are selling high-efficiency systems at a significantly higher rate. I believe it's around 70% or 75% of the time contractors using OnCall Air are selling these high-efficiency systems. Therefore, by helping influence that through this tool, we create a powerful opportunity because consumers receive a better product, contractors achieve larger sales, and we benefit as well. It's a win-win-win.
It sounds good. My follow-up, it's the first time we've seen other do better than the equipment in a long time. And as Paul said, the Residential New Construction is not helping. I assume all the duct work and thermostats and things in the other category. So should we not read into this that there's a stronger fix versus replace trend this quarter? Or is it, I don't know, commodities or I'm just making this up. Any thoughts on that?
It's pretty small. When you take a look at the entire marketplace, you just take compressors. The normal demand for compressors in the U.S. was about 1.2 million to 1.3 million, and the balance of them go to warranty because you have a 5- and a 10-year warranty on most of the equipment. If you take a look at the equipment side, it's 7 million to 8 million units. So for the offset of a down market on the unit side through additional parts, yes, it's going to help our gross margin. But no, it's not going to help the top line. It's not going to help a revenue line. The ratio is just too great between what parts represent versus equipment. Are we seeing an uptick? Yes, we started seeing an uptick in June, which historically is the month in which you're going to see that up - it's continued into July, but we really haven't seen a radical increase in units. We've seen an increase in dollars more than we have units.
Let's not mislead either. Our sales in the new quarter are pretty flat, with a small incremental low-digit increase. They do not signify a major double-digit increase yet.
No.
Yes. When we discuss the growth in units of compressors and coils, the year-to-date increase is in single digits. It hasn't been a significant transition yet; it may simply be that we're selling more compressors in the market. You may have heard Carrier mention this directly, as they are communicating with 150 independent distributors regarding this matter. Clearly, there is an opportunity to sell more parts, but the wholesale trend hasn't fully reflected that in the numbers so far.
As somebody mentioned earlier, the M&A, we're very eager to do more M&A. Some kind of opportunities arise when you have these kind of markets; I'm sure hoping for it.
Our next question will come from Jeffrey Hammond with KeyBanc Capital Markets.
Is this real Al or AI Al?
There's a combination. You have to figure that.
I know that's the real Al. Just to clarify on the flattish sales comment, was that parts for July? Or is that overall?
Overall.
Can you discuss where you would like your inventory turnover to be ultimately? I understand you were achieving around 4.5 turns a year before COVID and the regulatory changes, and now you're seeing 3 to 3.5. Where do you see that heading and what time frame do you envision?
Well, first of all, let me compliment you on the data. You're right about those turns. I'd like I'm not going to put a time limit on this, but I'd like to get to 5. At some point in time, given all the technology we're investing in, I'd like to get to 5.
If you think about pre-COVID, we were at 4.5%. We didn't have the technology investment in inventory systems and the management systems that we currently have. So as we come out of it, I think Al's goal of 5 is very attainable.
We have what we call the Dream plan. We may have mentioned it before. Actually, Dream plan 2 because Dream plan 1 was achieved after 3 years of effort and Dream plan 2 is new. It may take us 3 years to do that. Dream plan 2 is $10 billion in revenue, 30% gross profit margin, and 5x on the inventory turn. And those are the targets that we're focused on.
I remember when there was 10% growth and 10% margins for $100; you guys missed that opportunity.
Believe it or not, that was 20 years ago.
Hell of a history last one here today.
For those 20-something-year-olds listening to us, Jeff is right. It was called 10 and 10 equals 100. We got our management team together and rallied around that. Many of them thought Al was out of his mind. And obviously, we've blown past that some time ago. So we reinstituted that cultural kind of concept about 6 months ago, actually a year ago and got everyone together in some of the initiatives that you're not asking about today that you will ask about as we develop them is built on that Dream plan 2 concept. If we had 75 other Watsco core managers on this call, you would be able to ask them about it, not just ask us. I just know that culturally those kinds of things go on and we have fun with it.
Yes. And culturally, I mean, really, the takeaway is that we're super ambitious and that's why we're investing in these big goals that we expect to hit in time.
And the truth is that we also have an equity culture that really inspires people to achieve and meet the goals set by senior management, which means what is the equity culture? Many, many employees on Watsco shares either through a 401(k) or through a different stock plan. And we like that. We like the ownership culture throughout the organization. It's very unique and it's very extensive. And so that ownership culture drives their desire to meet goals, I think, and I've always used it, and it's been working. I expect it to continue working.
And our next question will come from Patrick Baumann with JPMorgan.
Maybe I was just curious if you could provide some examples of the large enterprise institutional customers you cite as offering emerging opportunities for growth like and what exactly are you doing to go after them?
Sure. Barry?
Go ahead, I would let AJ answer that.
I'll start by mentioning that we hinted at some of this in our press release and invited you to visit us in Miami to experience it firsthand. There are significant macro trends in our industry, particularly with private equity looking to acquire and consolidate contractors. We've seen the emergence of institutional customers, including home warranty companies and multi-location contractors who operate in various states like Florida, Texas, and Tennessee. Given our scale, we are positioned to be the preferred vendor and the most attractive option for them to purchase products. However, we currently lack a unified experience that allows these contractors to fully utilize our offerings. We are addressing this gap with our Watsco 1 initiative, which aims to provide a single platform for large institutional contractors to easily buy and access the products they need across multiple locations.
Interesting. Is...
This is a significant undertaking. It may not sound that way at first, but we operate as a very decentralized system. To effectively meet the needs of large national customers, we need to implement numerous initiatives, and we are investing in the tools to facilitate this process. Once achieved, this should have a substantial impact, as our capabilities are unmatched.
A follow-up to that. Would you consider selling to a larger national account contractor any different in terms of their purchasing capacity? Is that something you anticipate might pose a challenge for your gross margin over time?
Of course, that's one of the elements.
I would say yes, but we also have the opportunity to sell a lot more parts and supplies, which, as we discussed earlier, had a higher gross margin profile.
Right. That's why I think the answer isn't straightforward, Pat. Currently, when we consider larger institutional accounts, we primarily sell them equipment in bulk. To expand our offering means we're taking a customer and increasing the variety of products we sell them, which typically enhances our margin in the long run.
That makes sense. Okay...
Just Pat, I'm just going to say this again for the more or the front of it. I mean, a great home services business you could invest in the last 50 years is Rollins; if you don't know the company, look it up. I mean technology deployed at Rollins yielded 10% higher EBIT margins for their business over time, right? So the question is, in our partnership with any customer of any size, do we have a business model? An ecosystem that can help them grow, help them price products, help them operate their business 24/7. So part of the visibility of what we've done for most smaller contractors, the question is, is that a playable technology for larger accounts and larger contractors? And it's not about just selling more stuff; it's about helping any kind of size customer operate their business more profitably through us. Products just happen to be the ones they'll scale with to do that with. So this is as much of a technology play as it is a product or any other kind of label you might put on it.
Sounds interesting and exciting. Maybe just switching gears, my next question on the operating cost side. I think you said something in the release about targeting cost efficiencies for the rest of the year. Could you provide any color on, I guess, the 6% growth rate in the second quarter of SG&A expense? You mentioned cost of the A2L transition. I don't know how that kind of made its way into SG&A, but if you can give color on that? And then can you bend that growth rate in the second half with some of the cost efficiencies you're targeting?
Sure, Pat. I'll address that. Let's start with the 6%. In the release, we mentioned that we made some acquisitions and opened new locations, which accounts for about 25% of that 6%. Core SG&A growth is closer to 4.5%, which is still higher than expected in a down quarter, but that's our baseline. Considering the daily operations in a branch during a transition, more inventory means we have received more stock, necessitating more staff to handle it, and resulting in increased truck deliveries to our locations. This indicates we aren't optimizing our resources. Operations are not typical during such a significant transition. As we noted earlier, this affected all our domestic locations in the U.S., around 650. This is where we've seen some inefficiencies in labor and logistics. We believe we can balance that out by year-end, and our leaders are actively working on it. One factor that should assist is that approximately 5% to 7% of our inventory is 410A product, indicating we have received most of the new stock we need and have worked through the older inventory. This should allow our branches to return to a more normal routine and improve efficiency in the latter half of the year.
Yes. Just to say it a little my way, as we sell through 410A products, we need to make sure that we have system matchups that are selling in locations. So there's a lot of transferring products within our network to make sure that we have the right systems in place that are sellable in a market where they are selling, if that makes sense. So there's some extra costs that come into that as well.
And our next question will come from Damian Karas with UBS.
I'm curious how you're thinking about pricing through the rest of the year. On the equipment side, are prices pretty much set for the rest of the year, and you're just going to continue to get that benefit of the higher value mix flowing through the top line? And do you foresee any changes on your parts and commodity supplies with respect to price and just thinking about further metals inflation and tariffs?
I don't think on the equipment side we're going to see a lot of price increases going forward. On the non-equipment side, Friday is copper day; 50% tariffs start on copper. We've already seen about a 10% increase in some of those products that are heavily endowed with copper. So it's just a matter of wait and see on some of the non-equipment type products. I think the equipment is pretty much in place, though.
Understood...
I would just say let's make sure we focus on costs, specifically the cost of our products and equipment. I don't expect much change from our OEM partners. However, regarding pricing to our customers, that's determined by our tooling and technology. Each customer has a unique price for every product we offer in different regions and markets. This complexity presents an opportunity because our tooling allows us to analyze trends, patterns, anomalies, and segments that require appropriate pricing. We conduct various pricing strategies where we can measure and track the effects of changes in customer pricing or pricing for customer segments on different products. We can then bring this data to market, evaluate the outcomes, and decide whether to reinforce our approach or move on to other areas. Therefore, pricing will always be an opportunity to clarify the distinction between costs and pricing.
Got it. Got it. That's helpful. And I know this is never an easy task, but if you had to guesstimate, if you will, how much of a headwind to volumes in the second quarter do you think are attributable to weather and canister shortage versus weaker housing and underlying market demand? I'm just trying to get a sense for what underlying demand might look like as you move past the more transient issues.
Yes. I don't know if...
I don't think the canisters have anything to do with sales in the second half of the year. As far as the refrigerant we received. I think it's going to be what the consumer feels like, what the weather patterns are going to be like, how we're able to react and meet the inventory demands that the consumer needs or that the contractor needs to handle the consumer. I think it's just going to be blocking and tackling in the second half.
Yes. I mean, I think it's all been said, but this has got to be the noisiest year in HVAC ever between the tariffs and the weather and consumer confidence and the canister shortages and the homebuilding changes and interest rates and trading homes isn't happening as frequently. I mean there's just so many things going on at macro levels, most of which are out of our control. So it's a lot of noise in the industry, and our job is to win in any environment and emerge bigger and stronger and more profitable and take more share from our competitors. I like where we sit in that equation because of our scale, because of our balance sheet, because of our willingness and ability to invest in technology; I'm very, very pleased to be Watsco given all this noise.
And our next question will come from Nigel Coe with Wolfe Research.
I think you mentioned 410A was 60% or thereabouts for the quarter. I'm just curious how that trended or maybe where that's trending right now real-time. Any concerns that you're holding too much 410A inventory, just given the demand weakness? Or are you confident you'll be done with that transition this quarter?
I'm chuckling because that's very much on my mind, and yes, we're doing something about it so that we don't have that risk. Paul, you can answer in some detail if you'd like.
Yes, it's less than 5% of our inventory at the present time. Where we're really working our butts off is to be able to get the right combinations that A.J. mentioned before; you've got to have an indoor unit to go with the outdoor unit. As you sell the inventory down, the pond gets lower, and you end up with an indoor unit sitting in one city, and you end up with the outdoor unit in another. So we're putting those pieces together, which is going to be a drag on SG&A for a period of time here. But I think each one of our companies hears about it continuously that we need to reduce and keep the focus on 410A, get rid of it and focus on selling the A2L product that we've got.
Does that mean you're encouraging the sell-through process to make that happen?
That's not how we operate; we engage with the market in a decentralized manner, and those decisions are made locally in the areas where we are present.
I would just add that the progression of A2L has been very good. We ended the quarter in June with over 80% sell-through of the A2L product. This is due to the decreasing inventory of 410A, as well as contractors adapting well to the product, which aligns with the expected sell-through rate.
Okay. That's a great color. And then my follow-up is what we've seen from you and from your suppliers is tremendous strong price; price is holding, which is good news, but obviously, volumes are incredibly weak. What are you hearing from your contractors? Are they asking for some incentives here to try and stimulate some movements? Or are they content to just wait for rates to turn and perhaps demand picks up? Are you starting to get more inbounds on price reductions or discounts or incentives?
I don't think we're really getting a lot of feedback on getting lower prices in the market. There's not elasticity to this market. If we drop the price, 2% or 3%, it's going to stimulate a 10% or 12% increase in volume. It isn't going to happen. So I think the contractor always wants the lowest price, the best price in the marketplace so they can compete fairly. But I don't think we're getting a lot of pushback right now from most of the contractors on the price.
Our next question will come from Sam Snyder with North Coast Research.
Looking forward for an excuse to come down to Miami paid for by my...
You did hear it loud and clear, right.
Yes.
Let's wait for it to finish. I will be glad to welcome you when you arrive.
I wanted to just focus on the mix shift, which seemed to benefit margin. On parts. I was wondering if the shift was in part at all due to the canister shortage, where you have people do more repairs for the time being?
Most of the canister shortage occurred in the first and the second quarter. And it was something that we worked our way through. We made it through it. Now, as I said, we're seeing a lot more inventory coming in. It's going out as quickly as it comes in. I see it stopping sometime in early August. Early August is, what, two weeks away? So I don't think it's really playing on demand right now as heavily as it was before. I don't see any bubble happening on repair versus replace because of canisters.
Got it. Okay. And then just a real quick follow-up sort of on the same topic, but any sort of sizable shift to R-32 based systems? And if so, is that a temporary thing or more permanent in your view?
That's only one manufacturer. Daikin, which we represent very proudly with our Goodman and Amana alliance is R-32, the rest of the industry is 454. So what we've seen is we've seen excellent response from Daikin to be able to help us with the 32. There hasn't been a shortage of 32. When you get into the 454, it's been Carrier, Rheem, American Standard; all of them sell 454 units. And I would remind everybody that 454 is roughly 70% R-32. It's a blend of 32 plus 1234yf.
And our next question will come from Chris Dankert with Loop Capital Markets.
I guess circling back to Watsco 1, you guys sound excited. It sounded like it was a pretty big opportunity. Is there any way to get a bigger than a bread box sense here? I mean are we talking about serving 500 customer locations, 5,000? Or is it too early to get into that type of scaling?
A better approach might be to consider our current sales of parts and supplies and identify where we believe we can improve margins. This segment constitutes a significant part of our business, making up 30% of $7.5 billion. It's worth considering how much we could enhance our margins in this area. While I won't speculate on specific numbers, I anticipate there will be an improvement, and even a small percentage of that figure will be significant.
Makes sense. And I guess maybe just to touch on the AI a little bit here. Can you give us maybe some examples of what the use cases are for Ask.Watsco internally? I mean how is this kind of helping your associates? Is this inventory positioning? Is it warranty data? What's the real use case here?
There are numerous ways it's being utilized. It's assisting our marketing team with designing, creating, and publishing content. It's enabling our software engineers to write and deploy code more rapidly. It's also aiding our business unit leaders and their teams in analyzing data to identify trends, patterns, and anomalies. Furthermore, it's helping our customer service team handle more cases efficiently and provide accurate responses, which ultimately enhances customer satisfaction at a larger scale. There are about 2,100 internal users weekly engaging with these tools, and their applications are increasingly innovative and efficient.
Next question comes from Chris Snyder with Morgan Stanley.
I wanted to follow up on the 410A in inventory. I think you guys had was less than 5% of your inventory. Do you have any sense for what that number could look like across your distributor competitors?
No. I don't think we really have any good intelligence on that.
We are not focused on that, as it is not relevant to us. It is being phased out, and we don't have any concern about it.
Yes. Chris, there's a couple of data points. I mean, I think one peer of ours that also distributes the product gave a data point on that in terms of what their sell-through is, and it was pretty high. The other data point, these are all anecdotal. This is not science. It's aggregating anecdotes is when we are talking to M&A targets, what do they tell us about their philosophy and their positioning. And as a reminder, most of the stuff was built prior to December 31 and shipped in the first quarter. So someone would have to make a pretty big bet on inventory and would have to really leverage their balance sheet to do that. So our sense, just by having these conversations in the channel with the M&A targets, is that they're largely phasing out of 410A at about the same pace we are.
I appreciate that. And if I could maybe follow up on a different sort of inventory question. I guess it's kind of surprising that volumes remain down materially, it seems like in July with the weather picking up. Does that change the way you guys think about how much inventory is downstream at your customers? Could they have been holding extra stock? And perhaps that's why the sell-through has been softer?
I believe some larger contractors may have some inventory on hand, but this inventory is not significant for our industry as it's primarily stored at the distribution level rather than with the contractors. Therefore, it shouldn’t be a major issue for them. Also, keep in mind that in Florida, the weather is consistently hot; we haven't experienced a cool summer this year. The same goes for Texas. The real weather impact we observe is in the North, where there’s a chance every third year of experiencing a hotter, normal, or cooler summer. We’re clearly witnessing significant regional variations in volume due to weather conditions. However, in the South, we aren’t observing much change because it remains hot in places like Florida and Texas.
And this concludes the question-and-answer session. I'd like to turn the call back over to Albert Nahmad for any closing remarks.
Well, thank you for your interest. I'd love the questions and that shows a lot of interest and I hope we've answered your questions fully, and if not, please contact us on your own, and we will respond to whatever questions you may still have. And other than that, we look forward to having you visit us in the cold months that are coming, and we'll give you more detail. Thank you. Bye-bye.
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